Derivatives and Risk Management

6 Months Ended

Jun. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Risk Management

DERIVATIVES AND RISK MANAGEMENT

Changes in aircraft fuel prices, interest rates and foreign currency exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change.

Aircraft Fuel Price Risk

Changes in aircraft fuel prices materially impact our results of operations. We have recently managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of jet fuel as jet fuel prices are subject to potential volatility.

In response to this volatility, during the March 2015 quarter, we entered into transactions that effectively deferred settlement of a portion of our hedge portfolio. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2015 and required approximately $300 million in cash payments in 2016. We early terminated certain of the March 2015 quarter deferral transactions in the second half of 2015.

During the March 2016 quarter, we entered into transactions to further defer settlement of a portion of our hedge portfolio until 2017. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2016 and require approximately $300 million in cash payments in 2017.

Subsequently, to better participate in the low fuel price environment, we entered into derivatives designed to offset and effectively neutralize our existing airline segment hedge positions, which include the deferral transactions discussed above. As a result, we locked in the amount of the net hedge settlements for the remainder of 2016 and 2017. During the June 2016 quarter, we early settled $455 million of our airline segment's 2016 positions.

During the three and six months ended June 30, 2017, we recorded fuel hedge gains of $40 million and $97 million, respectively. During the three and six months ended June 30, 2016, we recorded fuel hedge losses of $41 million and $315 million, respectively.

Cash flows associated with the deferral transactions are reported as cash flows from financing activities within our Condensed Consolidated Statements of Cash Flows.

Hedge Position as of June 30, 2017

(in millions)	Volume		Final Maturity Date	Prepaid Expenses and Other		Other Noncurrent Assets		Other Accrued Liabilities			Other Noncurrent Liabilities			Hedge Derivatives, net
Designated as hedges
Interest rate contract (fair value hedge)	332	U.S. dollars	August 2022	$	—	$	1	$	(5	)	$	—		$	(4	)
Foreign currency exchange contracts	44,493	Japanese yen	November 2019	11		—		(12		)	(6		)	(7		)
	532	Canadian dollars	April 2020
Not designated as hedges
Fuel hedge contracts (1)	231	gallons - crude oil, diesel and jet fuel	December 2018	152		—		(355		)	—			(203		)
Total derivative contracts				$	163	$	1	$	(372	)	$	(6	)	$	(214	)

⁽¹⁾  As discussed above, during 2016, we entered into fuel hedges designed to offset and effectively neutralize our 2017 airline segment hedge positions. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2017 airline segment hedge portfolio.

Hedge Position as of December 31, 2016

(in millions)	Volume		Final Maturity Date	Prepaid Expenses and Other		Other Noncurrent Assets		Other Accrued Liabilities			Other Noncurrent Liabilities			Hedge Derivatives, net
Designated as hedges
Interest rate contract (fair value hedge)	349	U.S. dollars	August 2022	$	2	$	4	$	—		$	—		$	6
Foreign currency exchange contracts	54,853	Japanese yen	February 2019	31		3		(4		)	(3		)	27
	335	Canadian dollars	January 2019
Not designated as hedges
Fuel hedge contracts (1)	197	gallons - crude oil, diesel and jet fuel	January 2018	360		—		(684		)	—			(324		)
Total derivative contracts				$	393	$	7	$	(688	)	$	(3	)	$	(291	)

⁽¹⁾  As discussed above, we early settled $455 million of our airline segment's 2016 fuel hedge positions and entered into hedges designed to offset and effectively neutralize our 2017 airline segment hedge positions. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2016 and 2017 airline segment hedge portfolio.

Offsetting Assets and Liabilities

We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the net fair value positions by counterparty had we elected to offset.

(in millions)	Prepaid Expenses and Other		Other Noncurrent Assets		Other Accrued Liabilities			Other Noncurrent Liabilities			Hedge Derivatives, net
June 30, 2017
Net derivative contracts	$	7	$	1	$	(216	)	$	(6	)	$	(214	)
December 31, 2016
Net derivative contracts	$	31	$	6	$	(326	)	$	(2	)	$	(291	)

Designated Hedge Gains (Losses)

Gains (losses) related to our foreign currency exchange contracts are as follows:

	Effective Portion Reclassified from AOCI to Earnings				Effective Portion Recognized in Other Comprehensive Income
(in millions)	2017		2016		2017			2016
Three Months Ended June 30,
Foreign currency exchange contracts	$	4	$	12	$	(8	)	$	(63	)
Six Months Ended June 30,
Foreign currency exchange contracts	$	11	$	36	$	(33	)	$	(145	)

Credit Risk

To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings and limit our exposure to any one counterparty.